Sitting at my desk this morning, getting ready to write today’s lead article for PROFIT CONFIDENTIAL, my economically slanted mind started wandering…
Will the Dow Jones Industrial Average be successful at penetrating through the 13,000 level, or will the bear-market rally just slowly fade away? If I was a betting man, I’d have to go with Dow Jones 13,000.
We are living in unprecedented times of government and monetary stimulus. The Federal Funds Rate has remained at zero for so long, most people can’t remember the last time U.S. T-bills paid 6.5% interest. (It was 20 years ago, back in 1991.)
The Federal Reserve is buying Treasuries issued by the U.S. government. The government has bailed out or helped save banks, insurance companies, car makers, mortgage companies and who knows what else. There is a sea of liquidity in the markets.
After having the fear of God put into them, large corporations that escaped the credit-crisis carnage cut their expenses, cut staff, cut non-profitable divisions and focused back on their core businesses. And these companies started churning profits again. But instead of investing their cash in new equipment or buying other companies, they stashed the cash. Now, major U.S. companies sit with record amounts of cash in the bank.
My conclusion is that while I see the current market scenario as a rebound rally (from the market’s March 9, 2009, low) in the confines of larger bear market that started in October of 2007, there are plenty of incentives for investors to be lured back into the stock market.
And I think this is exactly what we are going to see: more people back into stocks, before the bear market reminds us all again of the serious, long-term, inescapable problems facing America. The adage “buyer beware” applies today for stock-market investors. But I believe Dow Jones 13,000 will become a reality first.
Michael’s Personal Notes:
I ran a series of stock-industry charts this morning to see the winners and losers of the year so far…
And not surprising in the least, the Dow Jones U.S. Home Construction Index is the biggest loser of the year. This index is still down 80% from its real-estate-boom-days high.
The biggest industry winner so far this year is the Dow Jones U.S. Health Care Index. It’s up 14.8% for 2011 and trading at a five-year high.
The stock market is a leading indicator. It tells us what is going to happen six to 12 months out. The pathetic performance of the Dow Jones U.S. Home Construction Index bodes well with my analysis of the housing sector—it’s a dead market for the foreseeable future.
In respect to health care, stock-market indices trade at five-year highs for a reason. There’s something in President Obama’s Health Care Reform (or possibly the removal of it) that health stocks really like. I don’t question the market’s actions—I just follow its lead.
Where the Market Stands; Where it’s Headed:
I’ve been looking for euphoria in the market to signal the end of the bear rally, and it looks like I got some of that yesterday. LinkedIn Corporation’s (NYSE/LNKD) stock almost doubled Thursday on its first trading day. The company went public at $45.00 a share. By mid-morning, the shares had hit $90.00.
At $90.00, LinkedIn is valued at about $8.0 billion…a little rich for a company that posted a profit of just $2.0 million in the first quarter of 2011.
Unfortunately, the speculative side of the market has been restricted to the Internet-related companies. The remainder of the market, while overvalued, is far from any speculative phase.
I still see more life left in the bear-market rally, even if the upside is limited to only another 10%.
What He Said:
“Consumer confidence does not change overnight. In the U.S., 70% of GDP is based on consumer spending. And in my life, all the recessions I have seen or studied have only come to an end when consumers started spending. With consumer sentiment getting worse, and with the U.S. personal savings rate at near record lows, it may take two or three years for consumers to start spending again.” Michael Lombardi in PROFIT CONFIDENTIAL, February 25, 2008. By the end of 2008, the rest of the world was realizing the recession would be much longer and deeper than most had realized.